What is Customs Fraud?

For essentially the entirety of American history, the US federal government has set in place various types of customs duties in order to promote domestic businesses by attempting to combat what is perceived as unfair competition by foreign businesses and/or foreign governments. 

The common types of current practices by such foreign businesses and governments that the US government is trying to prevent include: 1) “dumping” which refers to a situation where a foreign company or industry places products into the US economy at an artificially low price with the purpose or effect of putting American competitors selling those same products at higher prices out of business; and 2) foreign subsidies where a foreign government subsidizes a company or industry, such that it makes it difficult for domestic competitors to compete. 

Thus, US federal law often refers to customs duties – which are fees that importers must pay upon the time that the foreign products are imported to the US – as “antidumping” and “countervailing” duties (or AD/CV duties).  

As a general concept, “customs fraud” is thus very simple – an importer utilizes an illegal method by which not to pay, in whole or in part, the customs duties that it should be required to pay. 

Given the sheer amount of foreign goods entering US ports of entry every day, customs fraud can be very difficult for the federal government to detect and prosecute. While the U.S. Customs and Border Protection (CBP) collects and enforces the payment of customs duties, and the Department of Justice pursues criminal cases against those businesses and individuals suspected to have violated U.S. custom frauds laws, in many cases the federal government relies on individual, private whistleblowers to come forward with evidence of customs fraud. 

In return, a successful individual whistleblower who asserts a False Claims Act (FCA) lawsuit against a defendant engaged in customs fraud stands to receive a financial reward constituting 15-30% of the total economic recovery obtained in such a lawsuit, which can frequently be in the millions of dollars. 

Common Types of Customs Fraud

There are a number of common such methods that violators engage in custom fraud, including but not limited to the following: 

• Valuation Fraud: Valuation fraud refers to the fraudulent act of misstating and/or concealing the value of imported goods to the CBP for the purpose of lowering the amount of customs duties to be paid, as customs duties are determined as a percentage of the imported goods’ value. In some cases, such fraud is perpetrated by a company creating “double invoices” by which one set of invoices reflecting the actual costs of goods for the purchaser is created, while a separate fraudulent set of invoices reflecting an incorrect lower price is submitted to the CBP in order to pay lower customs duties. 

• Misclassification of Imported Goods Fraud: Misclassification of imported goods fraud overlaps with the concept of valuation fraud, in that importers may attempt to lower their customs duties by improperly classifying products as a type of product other than what they actually are in order to obtain a lower customs duty rate, or no customs duty at all. A common example of this is to fraudulently classify goods for sale as “sample goods” (for which no customs duty would apply) in order to avoid the payment of customs duties. 
• Country-of-Origin Fraud: Country-of-origin fraud, also referred to as “transshipment”, refers to a situation where an importer routes goods from the country of origin through a second, intermediate country before importing to the United States in order to avoid customs duties that would apply to the country of origin. 
• Structuring/Splitting of Shipments Fraud: Structuring or splitting fraud occurs where an importer divides shipments of goods into smaller portions in order to avoid customs duties, for example where there is a “de minimus” exception for imports of goods below a certain value, and the importer thus breaks up a larger shipment into several smaller shipments which each fall within the de minimus exception. 

How to Obtain a Whistleblower Reward for Reporting Customs Fraud

An individual with knowledge of customs fraud can pursue an FCA claim against the entity engaged in said fraud by filing a complaint under seal with a US federal district court and serving the complaint on the relevant U.S. Attorney’s Office. Because the complaint is filed under seal, the defendant will not at this point be necessarily made aware that such a lawsuit has been filed, and the plaintiff may be able to remain anonymous. 

Federal prosecutors will then have the opportunity to investigate the underlying allegations of customs fraud in the sealed complaint, and will then determine whether the federal government itself should intervene in prosecuting the case alongside the private plaintiff. Note, however, that even if the federal government does not intervene, the private plaintiff can proceed with the case. 

The seal on the case will then be lifted, and the private plaintiff (with or without the intervention of the federal government) will then litigate against the defendants. Many successful customs fraud FCA lawsuits end in a settlement with the defendants, which may include significant financial penalties. Again, the private plaintiff will be eligible to receive a portion of those financial penalties as a reward for their efforts in bringing forward the evidence of customs fraud. 

Hire an Experienced FCA Counsel

If you have evidence of customs fraud that has occurred, you may be in a position to pursue an FCA whistleblower case against the offending party, which, if successful, can result in a financial reward of between 15-30% of the total recovery in the FCA lawsuit. Similarly, if you have reason to believe that your business may be facing the threat of an FCA lawsuit based on customs fraud or other alleged fraud against the federal government, it is often critical to take swift action to address such matters. 

By working with experienced FCA counsel from the earliest stages of either asserting or responding to a FCA claim, you can protect your interests and maximize your chances of a positive outcome. Our attorneys have combined decades of experience in both the federal government and in the highest levels of private practice, and are ready to work with you to counsel you and/or your business on any FCA issues you may be facing.